Elizabeth Warren, Clueless or Complicit?

On March 8, 2007 the University of California Berkeley Jefferson Lecture Series presented The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net.

Since the title of the lecture closely paralled a topic I've been intending to explore, I decided that watching this lecture would serve to help me collect my own thoughts in preparation for writing on the subject.

The lecture was delivered by Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard University and past chair of the Congressional oversight panel created to oversee the 2008 U.S banking bailout. She conceived and led the establishment of the U.S Consumer Financial Protection Bureau, and is currently a US Senate candidate from Massachusetts. I've embedded the video, and I recommend watching it if you have the time.

What Ms. Warren Got Right

She opened her lecture by expressing her belief that "The single most important economic shift of the second half of the 20th century, in the United States, [was] that that millions of mothers poured into the full-time paid work force. A woman in 1970 who had a 16-year-old child was less likely to be in the work force than a woman in 2003 who had a six-month-old child at home. It was a profound shift in America."

"The median family in America went, over a 30-year period, from being a one-income household to a two-income household."

She then went on to express her vision of what changes in society she would have expected to see as a result of that shift. She would have expected people to migrate out of society toward the cities, to reduce commute time for mothers away from their children. Her second guess would have been that families would be very wealthy, with lots of savings, no debt, and plenty of vacation time. Those families would be secure, with not many bankruptcies and not many mortgage defaults.

As she points out, the reality was far different from what she would have imagined, and she documented that reality with extensive inflation-adjusted data generally covering the period from 1970 through 2005. While household income increased, income for fully-employed males declined slightly over that period. Income was rising only because women were entering the work force. Savings dropped from 11% to a negative 1% over that timeframe. Revolving debt increased from 1.4% to 15% of annual income. She intimated, but did not confirm with data, that other debt, such as mortgages, saw similar increases. In that single generation, debt replaced savings as the driver of the economy.

Noting the significant shift in the economic health of the country, she began looking for the reasons. She selected a four-person family as her baseline to maintain consistency, then started digging through data, first examining the items that she intuitively thought might account for the shift. Her intuition failed her time and again.

She was surprised to learn that spending on clothing went down by 32 percent, food expenditures dropped by 18 percent although the amount spent on dining out skyrocketed, home appliances declined by 52 percent, and even per car expense declined by 24 percent.

After some additional digging, she discovered five items that accounted for the shift in spending patterns, and while they were not in areas that seemed intuitive to her, regular readers of this Tireless Agorist can probably guess at least two, and perhaps three, with their eyes closed.

I'll give you those three first.

Home mortgages, she was surprised to learn, increased by 76 percent, even though the median home had grown from only 5.8 to 6.1 rooms. Health care was up by 74 percent. Taxes had increased by 25 percent.

The other two are also fairly intutitive. Family auto expense increased by 50 percent, because even though the cost of owning a single car had declined by 24 percent, most double-income families require two cars instead of one. Finally, child care, essentially zero in 1970, had grown to have a significant impact on family budgets by 2005, with both adults away from home at their jobs.

She noted that her baseline family spent about 50% of their income on those five categories in 1970, yet by 2005, that figure had increased to 75%, leaving only 25% of the family's income for "discretionary" purchases such as food and clothing. That increase helped to explain the decline in savings and increase in debt over the 35-year period.

She fears we're moving from a three-class to a two-class society. The middle class is getting wiped out and will leave us just with the poor and the elite.

In that she is correct, at least for the time period examined. We can confirm that by examining the Gini coefficient for income in the US . Roughly defined, the Gini coefficient measures the income inequality in an economy. The GINI coefficient for income of 38.6 in 1968 was the lowest reported in the US, when it started a rise to 47.0 in 2006, the highest index reported in the US, just before the housing bubble collapsed. That closely parallels the 1970-2005 timeframe that Ms. Warren's speech examines. While the middle class was losing ground, the rich were getting richer, and the poor were getting poorer.

There's quite a bit more to the video, and, again, I'd like to recommend watching it. But first, let me tell you what I believe was wrong with the part I've analyzed above.

What Ms. Warren Got Wrong

Not surprisingly, although I agreed with much of the diagnosis, I believe the speaker mistook the symptoms for the disease, failed to look deeply enough to discover the root cause, and therefore offered an inappropriate prescription that would worsen rather than cure the disease.

Her initial vision that two incomes would mean vastly increased wealth for families failed to show a basic understanding of supply and demand, as did her surprise that the income of fully-employed males stagnated over that time period. She failed to consider the impact that a sudden doubling of the available workforce would have on worker salaries. Why would employers continue to bid up the salaries of workers when the available supply had essentially doubled?

I was particularly struck by Ms. Warren's admission that she was surprised at the revelations about spending that the data revealed. She even points out that all the "experts" are as wrong about the perceived reasons for increased spending as she was.

In her initial search for the shift from savings to debt, she first examined items in relatively unregulated and competitive fields, such as clothing, food, appliances and cars. She was surprised to find that those items had all seen significant increases in affordability over the 35 years examined, although historically, highly competitive goods have become more accessible to a wider range of the population over time.

On the other hand, she expressed surprise that the three items that represented the biggest increase in spending were housing costs, healthcare, and taxes. Readers of The Tireless Agorist will remember The Booze Cause of the Economic Crisis, which explained the increase in spending in housing costs, and A Government Big Enough... which explained the increase in spending in healthcare. Given that we have a progressive-rate income tax, which means that a second earner's first dollar starts at the top rate of the first earner in a household filing jointly, the increase in taxes should have come as no surprise. She also makes no mention of the complicity of the Federal Reserve in destroying the dollar as a store of value, as we examined in The Perils of Paper Money and Not Worth a Continental.

Summary

Regular readers of The Tireless Agorist will recognize that the destruction of the middle class over the last 50 years is in large part the result of government policies that greatly inflated the cost of housing and medical care and crippled the dollar as an instrument for the accumulation of wealth within the middle class. They will also know that current government policies can only be expected to perpetuate that madness. Yet never does Ms. Warren show any recognition that government policies have anything to do with these problems.

To be fair to Ms. Warren, her speech was given in March of 2007, when the first signs of the economic disaster caused by the housing bubble collapse were just making themselves known, and many, many mainstream economists and politicians were claiming everything was just fine. Even today, many of those same "experts" are claiming that further intervention in the housing and healthcare markets and better management of the fiat money system are what is needed to correct the problems that intervention has created in the first place. But it's fair to wonder if Ms. Warren is sincerely clueless as to the true causes of the disaster befalling the middle class, or whether she's complicit in perpetuating a system that exacerbates the very problem she professes to deplore.

On July 29, 2011, she left her role with the the five-member Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act to return to academic life at Harvard Law School. Perhaps this quote from her departing address will help answer that question.

Four years ago, I submitted an article to Democracy Journal that argued for a new government agency called the Financial Product Safety Commission. I threw myself into that piece because I felt strongly that a new consumer agency would make the credit markets work better for American families and strengthen the economic security of the middle class… I leave this agency, but not this fight… the issues we deal with – a middle class that has been squeezed and business models built on tricks and traps – are deeply personal to me, and they always will be.

In the final analysis, I'll leave the decision to the reader.

...and that's all I have to say about that.